Easy Money, Greed Create Market Glut, Developers Say

May 15, 1986|By Jack Snyder of The Sentinel Staff

Why are Orlando and most other major markets in the nation so overbuilt with office space and hotel rooms? And since these markets are awash with rooms and space, why are office complexes and hotels still being built?

Three major developers attending the Urban Land Institute's 50th anniversary meeting at Walt Disney World last week offered some answers from their vantage point as industry insiders.

The consensus was that the amount of building correlates directly to the huge amounts of money available to be borrowed by developers.

The building is going on, the developers said, because even in overbuilt markets there are still ''opportunity pockets'' to be exploited.

President Lee C. Sammis of Sammis Co., a development company based in Irvine, Calif., called the excessive building ''an easy-money drunk'' compounded by the greed factor.

Jay Maxwell, senior vice president of Hyatt Development Corp. in Chicago, offered another explanation. A major hotel can take up to four years to complete and open, he said. ''Often you start in a good market and open in a bad market,'' Maxwell said.

He said hotel operations with strength and management expertise can ride out the cycles. And the large operators will continue to look for pockets of development opportunities, Maxwell said, even in markets supposedly saturated with rooms.

Arch K. Jacobson, president of Prudential Development Co. of Newark, N.J., agreed that easy money was a major factor but noted that two other factors helped spur the construction surge, especially in office space.

Jacobson said that another influence was the fact that the nation is shifting from a manufacturing nation to a services-oriented society that demands a tremendous amount of office space, Jacobson said.

Also coming into play, he said, is the fact that little development was undertaken in the mid-1970s because of a national recession.

In many areas of the country in the late '70s, Jacobson said, office vacancy rates were as low as 1 percent to 2 percent.

At the same time, the financial markets were ''awash with cash and nowhere to lend it,'' Jacobson said.

Jacobson said bank deregulation and the aggressive expansion of many savings and loan associations in real estate development helped bloat the amount of capital available to developers.

Ten years ago, 31 percent of the capital for real estate development around the nation came primarily through loans from life insurance companies, Jacobson said.

Today, that has fallen to about 22 percent, he said, while the share among savings and loan associations has gone from virtually nothing a decade ago to 30 percent today.

Jacobson said many people mistakenly think that all insurance loans for real estate development come from premium dollars.

Not so, he said -- most of that investment money comes through pension funds. Those funds, intent on earning a set income for a stated period of time, will purchase a guaranteed-income certificate from an insurance company, Jacobson said.

Jacobson said he thinks most markets around the nation are stabilizing as developers cut back on new projects.

There's no question that ''profitability is down,'' he said, and in some of the worst overbuilt markets, some investors and developers will suffer ''substantial capital losses.''

As long as the economy is relatively strong, no massive shakeout will occur, he predicted. But until space and room inventories are reduced sharply nationwide, investors and developers should be picking their markets ''very carefully,'' Jacobson said.